CBO estimates Obama's 2013 budget plan would hit economic growth

The nonpartisan Congressional Budget Office saidFriday that President Obama’s 2013 budget will hurt the economy in the long term, arguing the larger deficits it would produce would reduce the amount of capital available to businesses.

After five years, the CBO says, the Obama proposals would reduce economic output by between 0.5 percent and 2.2 percent.

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Larger deficits caused by the budget would cause the government to issue more bonds, sucking up private capital to finance its debts and thereby reducing the funds businesses could use to expand and hire, the CBO said. An increased tax on capital gains included in the president's plan would also tend to reduce private capital, it says.

The 2013 Obama budget proposes continuing the Bush tax rates for the middle class and enacting elements of a short-term Jobs Act stimulus. In the near term, actions such as these could increase growth by as much as 1.4 percent, CBO says.

The new CBO report complements a March estimate that Obama’s budget would add $3.5 trillion to deficits over 10 years compared to current law. That report did not try to capture any effects on economic growth.

The White House, using a different baseline than CBO, has claimed its budget would reduce deficits by $3.2 trillion over 10 years.

Taking economic effects into account, Obama’s budget could add as much as $3.9 trillion in deficits by 2022, CBO estimates. Slower economic growth tends to increase deficits by reducing tax collection and increasing spending on items like unemployment insurance.

In analyzing the Obama budget's effect on deficits and economic growth, the CBO compares it to a "current law" baseline that assumes large deficit reduction from, for
example, allowing all of the Bush tax rates to expire and doctor payments
from Medicare to be slashed.

Congress is unlikely, however, to allow all of the Bush tax rates to expire, because Obama and lawmakers in both parties want to extend the Bush rates for households with annual income less than $250,000. Republicans want to extend all of the Bush rates, or to lower tax rates.

The White House emphasized the baseline issue in its reaction to the report.

"CBO is using a current law baseline, which is not considered to be an accurate reflection of the fiscal picture," a senior official at the Office of Management and Budget said. The official emphasized that compared to a more realistic baseline, the Obama budget helps growth.

"In addition, under CBO’s estimates of what would happen if we continued business as usual, the economy would be worse off if we did not pursue the Administration’s economic growth and deficit reduction policies," the official said.

Under the current law baseline, CBO estimates tax hikes and spending cuts would hurt growth in the short term. But by shrinking deficits, it would help economic growth in the long run, the CBO says.